Israeli economy braces for European blowout

Media Line economist poll sees GDP growing 2.8 percent this year, but with downside risk.

By DAVID ROSENBERG / THE MEDIA LINE
January 3, 2012 23:34
Economic outlook.

economic outlook graph economy money 311. (photo credit: Stockbyte)

Israeli economic growth is almost certain to dip this year, but no more than that, even as Europe’s debt woes squeeze exports and consumers keep their pocketbooks closed, a survey of leading forecasters conducted by The Media Line shows.

Gross domestic product will expand 2.8 percent in 2012, according to the median forecast of 12 economists in the poll. That is a rate that most of the developed world can look on with envy. The Organization for Economic Cooperation and Development (OECD) estimates its 34 members, which count most of the world’s advanced economies, will show median growth of 1.6% this year.

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Nevertheless, the forecast puts Israel’s pace of growth far below the 5% annual pace of the previous two years. Many economists say Israel faces more downside risks to its growth outlook, especially in the first part of the year, until it becomes clear whether Europe can sort out its debt problems.

“Our forecast is likely to move down rather than up,” Rafael Gozlan, chief economist at IBI-Israel Brokerage and Investments, told The Media Line. He sees GDP expanding 2.7% in 2012. “The world economy will be more sensitive to shocks in first half. There are stimulus measures being taken all over the world, but they will only be felt in the second half.”

Thanks to fiscal policies and bank lending that were both conservative, Israel stood aloof of the world financial blow-out of 2008. Economic growth briefly slowed at the end of 2008 and early in 2009, but quickly recovered so strongly that Israel was rare among industrialized economies to experience ballooning home prices over the past two years. Its unemployment rate at the end of 2011 was at its lowest since the 1980s.

But with a second financial crisis threatening – this time originating in European sovereign debt rather than US mortgages – Israel will again have to contend with a downturn not of its own making. And this time, Israel’s parameters are in some cases weaker than they were going into the last global crisis.

“It is uncertain how much growth can withstand further global economic deterioration,” Daniel Hewitt, Barclay’s Capital Israel economist, said in a December 19 report. His forecast for 2.5% growth in 2012 is the lowest among the economists polled.

Israel’s current account surplus has been shrinking and is likely to turn into a deficit in 2012 for the first time in a decade. While the government didn’t run up big debts bailing out banks as its counterparts did in Europe and the US, Israel nevertheless now has bigger budget deficits than it did going into the last global downturn at a time when the world’s financial markets are more alert than ever to countries’ fiscal profiles. 

Worse still, Prime Minister Binyamin Netanyahu has less leeway than in the past to impose fiscal discipline. The army is demanding more money to cope with the security risks to Israel created by the Arab Spring, while the mass social protests over the summer of 2011 have increased demands from the public for more government assistance for everything from education to more health care.

Netanyahu is believed to be considering abandoning cuts to the army’s 2012 budget. With slower growth expected to cut into government tax revenues this year, there will be little room for increased social spending, including a proposal for longer school days, that were at the heart of a series of recommendations made by a government panel to alleviate income disparities.

Slower growth will feed into higher unemployment, which will only increase the pressure on Netanyahu to act. Unemployment fell to 5.6% in the third quarter of 2010, the latest period for which there are reliable figures, but the median forecast of nine economists polled by The Media Line show the jobless rate rising to 6.0% in 2012. Psagot Investment House sees the rate reaching 6.8%, the highest among the forecasters.

Shlomo Maoz, chief economist at the investment bank Excellence Nessuah, is more bullish than his colleagues, predicting GDP growth of 3.5% this year and maybe higher. He sees output slowing in the first half of the year, but said it will be followed a strong rebound in the second.

“Israel is relatively immune from global problems,” he told The Media Line. “We have increased exports to others countries outside of Europe. Our new export markets – Asia, South America and others -- are now close to 50% of total exports.”

Indeed, top-line GDP figures haven’t shown that much of a slowdown yet. Although it has decelerated from a 4.8% pace in the first quarter of 2011, GDP continued to expand at a healthy 3.5% rate in the third quarter. After a period of decline last year, merchandise exports showed a small uptick in October and November. 

On the other hand, consumer confidence indices point to a high degree of pessimism about the economy’s outlook. The Purchasing Managers Index published by Bank Hapoalim and the Israel Purchasing and Logistic managers Association fell 6.9 percentage points in November, which signals contracting manufacturing activity. Direct tax revenues, a barometer of economic activity, were 6% lower in November after inflation than they were a year ago.

Bank of Israel Governor Stanley Fischer has already acted in anticipation of the economy’s more sluggish pace by cutting interest rates by a half percentage point over the past four months to 2.75%. One reason he can act so decisively is that inflation is no longer the threat it was last spring and summer, when it was running at a rate above 4%.

For 2012, the median inflation forecast of 11 economists polled by The Media Line is 2.1%, which is comfortably inside the government’s target of 1% to 3% annually. As a result, some economists see Fischer lowering the base rate to 2% by mid-year to keep businesses activity moving. Even if he changes course again in the second half the rate will land at 2.3% at the end of 2012, lower than today, according to the median forecast of eight economists polled.


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